Blank Check Company - Explained
What is a Blank Check Company?
Written by Jason Gordon
Updated at July 10th, 2021
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Table of Contents
What is a Blank Check Company?What Qualifies as a Blank Check Company?Academics Research on Blank Check CompanyWhat is a Blank Check Company?
A company that has no defined business operations or that is at an early stage in terms of business development is a blank check company. A blank check company is a company with no specific business plans, such a company thrive on the intention of acquiring another business or merging with another entity. The Securities and Exchange Commission recognize blank check companies, these companies are bound by Rule 419 of the SEC and are unattractive to active investors. Basically, blank check companies engage in speculative investments which is why the SEC penny stocks or microcap stocks.
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What Qualifies as a Blank Check Company?
Due to the nature of blank check companies, the Securities and Exchange Commision in the United States have strict rules for these companies. Blank check companies have no concrete or established business plans, these companies have no clear directions with regards to business operations. Blank check companies are speculative in nature, they are either hoping to acquire or merge with another business. The SEC has specific requirements and regulations that bind blank check companies. Generally, blank check companies are not eligible for specific exemptions that other businesses can enjoy under Regulation D of the Securities Act of 1933. According to the SEC, a blank check company cannot use Rule 504 or engage in securities offerings that is up to $1 million. There are types of blank check companies that the SEC recognize. A type of blank check company that can raise funds through an initial public offering (IPO) can be called a special purpose acquisition company (SPAC). The money raised is used to fund merger or acquisition that the company intends to do, the time frame for such merger or acquisition is within 24 months.
Academics Research on Blank Check Company
- Blank check IPOs: a home run for management, Jog, V. M., & Sun, C. (2007). Blank check IPOs: a home run for management.Available at SSRN 1018242. In the last four years, sixty-two blank check companies have raised $4 billion dollars with their IPOs. According to the SEC definition, a Blank Check company is a development stage company that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These companies typically involve speculative investments and often fall within the SEC's definition of "penny stocks" or are considered microcap stocks" even though some of these companies raise more money than a typical standard IPO. In this paper, we document various aspects of these companies and IPOs and analyse the returns earned by shareholders and management, from their issuance date to the post-acquisition date. Our results show that the shareholders of blank check IPOs earned minus 3% annualised abnormal returns, whereas management earned approximately 1900 percent annualised return. It looks like the investors essentially wrote a blank check to management.
- Special purpose acquisition companies: SPAC and SPAN, or blank check redux, Riemer, D. S. (2007). Special purpose acquisition companies: SPAC and SPAN, or blank check redux.Wash. UL Rev.,85, 931.
- Institutional changes of SPACs, Lakicevic, M., Shachmurove, Y., & Vulanovic, M. (2013). Institutional changes of SPACs. We document the changes of corporate design of modern Specified Purpose Acquisition Companies (SPACs) from 2003 to 2012. We assign the impact on changes of SPACs to each of the three groups of stakeholders: founders, investors and underwriters and test whether institutional characteristics of SPACs determine the success of their merger outcomes. We document that SPACs significantly redesigned its structure in the period under observation. Additionally, the probability of the merger for SPACs is increasing if they are able to; announce the deal soon after the IPO, focus that deal on China and have their IPO underwritten by EarlyBirdCapital
- Reverse Mergers and Nanotechnology, Smith, D. M., Goldstein, D. S., & Heideman, J. (2007). Reverse Mergers and Nanotechnology.Nanotech. L. & Bus.,4, 87.
- Specified purpose acquisition companies in shipping, Shachmurove, Y., & Vulanovic, M. (2015). Specified purpose acquisition companies in shipping.Global Finance Journal,26, 64-79. This paper examines Specified Purpose Acquisition Companies (SPACs) used as a financing tool for the shipping industry in the period 20042013. SPACs that focused on acquisitions in the shipping industry have statistically similar characteristics to the population of SPACs that entered U.S. financial markets. Additionally, shipping companies merge into SPACs for the benefits of acquiring a public listing and receiving the SPAC's cash. The paper constructs an original SPAC Shipping Index and compares its performance with benchmark indices. Under some conditions, managers of SPACs with a focus on shipping on average exhibit a return of $154 for every $1 invested.